Choose an industry and identify the factors that will determine its performance in the next three years. What is your forecast for performance in that period?
Positive but not very aggressive
Name of Industry- Biotech industry.
Factors affecting its performance – M&A activity, R&D, Politics, Global factors, Technological factors, Funding, Political atmosphere, and regulations.
It is positive but not very aggressive. The gains over the last three years have been very unsustainable but the spread of pandemics such as COVID-19 has fuelled an unprecedented growth. The sector has much potential to pump in the investment in R&D to grow.
Recalculate the intrinsic value of Honda shares using the free cash flow model of Spreadsheet 13.2 (available at www.mhhe.com/bkm; link to Chapter 13 material). Treat each scenario independently.
a. Honda’s P/E ratio starting in 2015 will be 13.5.
b. Honda’s unlevered beta is .7.
c. The market risk premium is 8.5%.
Adams’s research report (see the previous problem) continued as follows: “With a business expansion already under way, the expected profit surge should lead to a much higher price for Universal Auto stock. We strongly recommend purchase.”
a. Discuss the business-cycle approach to investment timing. (Your answer should describe actions to be taken on both stocks and bonds at different points over a typical business cycle.)
b. Assuming Adams’s assertion is correct (that a business expansion is already under way), evaluate the timeliness of his recommendation to purchase Universal Auto, a cyclical stock, based on the business-cycle approach to investment timing.
Universal Auto is a large multinational corporation headquartered in the United States.
For segment reporting purposes, the company is engaged in two businesses: production of motor vehicles and information processing services.
The motor vehicle business is by far the larger of Universal’s two segments. It consists mainly of domestic United States passenger car production, but it also includes small truck manufacturing operations in the United States and passenger car production in other countries. This segment of Universal has had weak operating results for the past several years, including a large loss in 2012. Although the company does not reveal the operating results of its domestic passenger car segments, that part of Universal’s business is generally believed to be primarily responsible for the weak performance of its motor vehicle segment.
Idata, the information processing services segment of Universal, was started by Universal about 15 years ago. This business has shown strong, steady growth that has been entirely internal: No acquisitions have been made.
An excerpt from a research report on Universal prepared by Paul Adams, a CFA candidate, states: “Based on our assumption that Universal will be able to increase prices significantly on U.S. passenger cars in 2013, we project a multibillion-dollar profit improvement . . .”
The following questions have appeared on CFA examinations.
a. Which one of the following statements best expresses the central idea of countercyclical fiscal policy?
(1) Planned government deficits are appropriate during economic booms, and planned surpluses are appropriate during economic recessions.
(2) The balanced-budget approach is the proper criterion for determining annual budget policy.
(3) Actual deficits should equal actual surpluses during a period of deflation.
(4) Government deficits are planned during economic recessions, and surpluses are utilized to restrain inflationary booms.
b. Which one of the following propositions would a strong proponent of supply-side economics be most likely to stress?
(1) Higher marginal tax rates will lead to a reduction in the size of the budget deficit and lower interest rates because they expand government revenues.
(2) Higher marginal tax rates promote economic inefficiency and thereby retard aggregate output because they encourage investors to undertake low-productivity projects with substantial tax-shelter benefits.
(3) Income redistribution payments will exert little impact on real aggregate supply because they do not consume resources directly.
(4) A tax reduction will increase the disposable income of households. Thus, the primary impact of a tax reduction on aggregate supply will stem from the influence of the tax change on the size of the budget deficit or surplus.
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